GENEVA, Feb 11 (Reuters) - Commodity trading houses pouring
millions of dollars into buying physical assets risk shifting
capital away from their core business and driving out top
talent, according to a study by advisory firm Deloitte
Switzerland.

Following the model of Swiss commodities giant Glencore
, many independent trading houses have sought to snap up
assets such as oil refineries and aluminium smelters.

Last year, Geneva's Vitol and Gunvor bought refineries from
insolvent oil refiner Petroplus while Trafigura said in February
its subsidiary Puma acquired a network of fuel service stations
in Australia.

Deloitte said that the expansion from their traditional
business of spotting niche deals to buy and sell commodities
would extend their control over supply lines and increase
options for trading.

But, the strategic shift also entailed risks, the study
warned.

"For some trading companies with less experience of
operating assets, the risk exists that by vertically integrating
across the supply chain in order to capture some margin, they
will enter capital-intensive operations in which they have
limited experience and from which an exit is not necessarily
easy," the study said.

The report, released on Monday, warned that trading talent
could feel "dislocated" as commodities firms morph into large,
integrated corporate giants.

"If, as result of acquisitions, companies start to look and
act more and more like integrated energy companies and big
miners, is there a risk that the entrepreneurs who drive the
trading business will chafe on their diminished roles?"

It added that departures could result in new hedge funds and
spin-off trading shops.

The vogue for buying assets was also forcing trading houses,
which are mostly privately owned, to find innovative ways of
raising capital for the longer term in a tight credit
environment as banks cut lending, the report said.

Some trading houses have already begun adapting to these
challenges such as Louis Dreyfus which issued its
first bond last year and Mercuria which plans to sell up to 20
percent to a strategic investor.

RISING COSTS

Another key challenge facing the sector will be the costs
associated with new regulations designed to eliminate
manipulation, which could push up energy and food prices, and
increase transparency in the traditionally secretive sector.

"A number of new regulatory requirements, either imminent or
mooted, are likely to increase not only the compliance
obligations for trading companies but also, in some cases, the
cost of funding," the report said.

Deloitte said that the new clearing mandate for the $648
trillion over-the-counter derivatives market under the U.S.
Dodd-Frank act would reduce credit risks but force increased
capital buffers.

And it said that non-compliance with "long-reach"
legislation such as the U.S. Foreign Corrupt Practices Act and
the UK Bribery Act had the potential to put a company out of
business.

It also noted that trading companies, like major oil firms
and mining firms, would also be more exposed to resource
nationalism because of their investment in assets.
(Editing by Ed Davies)